Article
Ten considerations in a quality of earnings study
March 25, 2022 · Authored by William A. Chapman
Preparing for a potential acquisition
When entering into a preliminary agreement to purchase a going concern, it is considered prudent for the buyer to contract independent professionals to conduct a quality of earnings report (QoE report) in order to validate the buyer’s investment thesis. A proper quality of earnings analysis encompasses a variety of elements. The following is a short list of considerations when determining the appropriate scope of a quality of earnings study.
1. A quality of earnings study is not an audit
Clients frequently ask why there is a need to perform a quality of earnings study when the subject company is already audited. There are several differences between an audit and a quality of earnings study. Such differences include the following: In a quality of earnings, the focus is on the economic earnings vs. the balance sheet serving as the focus in an audit; a quality of earnings is a consulting engagement, not an attest service, providing flexibility in the approach and scope; and the materiality is much lower in a quality of earnings study than an audit.
2. What gives earnings "quality?"
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